How to diversify when comfortable ...

Question

Hi all, so two years ago I bought my first STR in the Smokies (PF area), the next year I bought another. I am about to start construction on my largest investment yet, in the same area.

A few questions:

1. I am relatively well convinced the area I have invested in is as good as it gets for STR. Should I diversify for future investments ? The fourth and fifth etc.

2. If the answer to number one is yes, how do you even start analyzing that? I compared the returns I get already to say buying something in Panama Beach last year and it didn’t even come close. If one wanted to diversify, how do you do it successfully?

3. If I’m comfortable with STR, should I stick with that or branch out into LTR or try something more foreign to me like house hacking or whatever.

Appreciate it!

Paul Sandhu · Answer

1. Yes.  The way I diversified is by purchasing small, medium and large houses in the same market.  Small sleeps 2, medium sleeps 3-4, large is 5+.

2. Try investing in a different market with different kinds of clientele.

3. Stick with STR.  If you went to LTRs you would be disappointed.  Sort of like living on Reds, Vitamin C and cocaine; to living on the nicotine patch, a multivitamin and diet soda.

Alan Ford · Answer

@Paul Cox hi Paul - I had enough income to support the DTI requirement for the second home and I put 20% down.  My personal resides and the two rental properties wiped out my DTI capacity. I used the funds from the first cabin and some personal funds as the down payment for number 2. For the construction project I was able to clear the debts for both rental properties as I now had a two year history as a “landlord” - and some additional income to show from the properties by showing they sustained themselves. Then I used some mix of personal funds and home equity at great rates to finance the construction project. Single close loan 20% down and 3.5 fixed automatically converting to a 30 year loan when construction is done. I was able to get it as a second home, siting that my first cabin no longer suited my needs and I wanted something larger etc. I also do plan to stay in that cabin more often as I am able to work from home.

Paul Cox · Answer

@Alan Ford, I'd be interested in learning how you've financed # 2 and the new construction property. We purchased our first cabin back in November in PF thanks to @Avery Carl and @Lucas Carl guidance and direction and @Parker Borofsky with help in the lending arena. We did a second home loan with 10% down and then prepaid the Mortgage Insurance. It was doing great until the virus hit, but we're actively looking for the next cabin. Our first cabin is a 1 bdrm with a loft and so we're looking for the next one to be bigger.  Anyway, always looking to learn from my fellow investors.  Thanks again

Paul

Alan Ford · Answer

@Avery Carl sounds like a plan. Mark the calendar for 2022 unless there are ways to go sooner.

Luke Carl · Answer

@Alan Ford I do my best to never get comfortable. I've currently got 26 doors in 4 different markets. STR (6) and LTR. I "self manage" all of them, which became easier once I hit the 25 or so door mark. It's easier to hire people and keep them busy enough to know your name.

Absolutely must get in to LTR. It's a whole different animal than what you're currently doing. Yet exactly the same.

Ken Latchers · Answer

I prefer not paying cash as long as there a cheap mortgages around. I got several properties with a 6% investment mortgage. And the interest is deductible.

If I paid cash I would have 80% fewer properties. than with 20% down!!!

reasonable leveraging is where the money is made. Other people's money. Not all cash

or think of it this way, let's say I got a 10 Plex instead of a duplex?

yes you should absolutely have long-term rentals. Many short-term renters are now getting killed because they have no diversification, whether they have large or small places

Luke Carl · Answer

If you're buying a LTR with a signed lease you can use 75% of that rent number in favor of your DTI. If it doesn't have a lease they can do a market rent valuation during the appraisal. Method two also works for a STR. They never come back around to see if you actually put a lease on it or not.

John D. · Answer

@Alan Ford we have comparable returns, within a short drive of where you live.  One could say the return potential is actually much larger, if you are willing to take on a more unique project.  Feel free to reach out for more info, my average property has a higher COCR, but also comes at a higher price point and may require more upfront work.

Alan Ford · Answer

@John Underwood self directed Roth... I assume I can’t have one of those since I am a w-2 employee and they pay into a traditional Roth?

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